Chapter 20 Money, Financial Institutions, and the Federal Reserve (BUS 2000)

Money

Anything people generally accept as payment for goods and services.

Barter

The direct trading of goods or services for other goods or services.

Standards for a useful form of money:

• Portability
• Divisibility
• Stability
• Durability
• Uniqueness

Money Supply

The amount of money the Federal Reserve Bank makes available for people to buy goods and services.

M1

Which is money that can be accessed quickly and easily
(coins, paper money, traveler’s checks, etc.).

M2

In addition, M2 is all of M1 plus money that may take a little more time to obtain (savings accounts, mutual funds, etc.).

What is the difference between M1 and M2?

M1 is a more limited and more liquid type of money. More types of money are included in M2, but they are less liquid than those included in M1

Falling dollar value

The amount of goods and services you can buy with a dollar decreases.

Rising dollar value

The amount of goods and services you can buy with a dollar increases.

Hierarchical leadership of The Federal Reserve

1. The Board of Governors

2. The Federal Open Market Committee (FOMC)

3. Twelve (12) Federal Reserve Banks throughout the
USA,

4. Three (3) advisory councils

5. And finally, all the member banks within the
system

Reserve Requirement

A certain percentage of the value of commercial banks’ checking and savings accounts that must be physically kept in the bank.

Open-Market Operations

buying and selling of U.S. government bonds by the Fed with the goal of regulating (either increasing or decreasing) the money supply.

The Discount Rate

The interest rate that the Fed charges for loans to its member banks.

Commercial Banks

are profit-seeking organizations that receive deposits from individuals and corporations in the form of checking and savings accounts and uses those funds to make loans.

A commercial bank has two types of customers:

1. Depositors
2. Borrowers

Demand deposit

A checking account; money can be withdrawn anytime on demand from the depositor.

Time deposit

A savings account; a bank can require prior notice before the owner withdraws money.

Certificate of deposit

A savings account that earns interest, to be delivered on the certificate’s maturity date.

Services to Borrowers

Loans are given on the basis of the recipient’s creditworthiness.

Savings and Loan Associations

A financial institution that accepts both savings and checking deposits and provides home mortgage loans. Often known as thrift institutions because their original purpose was to promote customer thrift and home ownership.

Credit Unions

They are nonprofit, member-owned financial cooperatives that offer a full variety of banking services to their members. As nonprofits, credit unions enjoy an exemption from federal income taxes.

Nonbanks

Financial organizations that accept no deposits but offer many of the services provided by regular banks.

Pension funds

Amounts of money put aside by
corporations, nonprofit organizations, or unions to cover part of the
financial needs of members when they retire.

• Brokerage firms
• Commercial finance companies
• Corporate financial services

Federal Deposit Insurance Corporation (FDIC)

An independent agency of the U.S. government that insures banks
deposits up to $250,000.

Savings Association Insurance Fund (SAIF)

Part of the FDIC that insures holders of accounts in savings and loan associations

National Credit Union Administration (NCUA)

Provides up to $250,000 coverage per individual depositor per institution.

Letter of Credit

A promise by the bank to pay the seller a given amount of money if certain conditions, like shipment of goods, are met.

World Bank

Lends most of its money to less-developed nations to improve their productivity and help raise standards of living and quality of life.

International Monetary Fund (IMF)

Fosters cooperative monetary policies that stabilize the exchange of one national currency for another. About 189 countries are a part of the IMF.